Railroads, Warren Buffett and the Future of America

Thursday, November 5, 2009

Train tracks VAThe official announcement of Berkshire Hathaway’s takeover of Burlington Northern included this Warren Buffett quote:

It’s an all-in wager on the economic future of the United States. I love these bets.

His comments are in the tradition of J.P. Morgan and James J. Hill, who created Northern Securities, the first version of Burlington Northern (ex-Santa Fe).

Here are Morgan’s and Hill’s quotes, along with more from Buffett…

Similar to Buffett, a favorite Morgan saying was, “Don’t sell America short.” (His father’s lengthier version was, “The pessimists may win for a time, but in the long run the growth of the country will always beat them.”)

Hill’s comment was more direct: “The man who sells the United States short is a damned fool.”

CNBC conducted an interview to expand on Buffett’s comments: Warren Buffett Explains His Railroad ‘All-In Bet’ on America.

Here are selected excerpts for thinking about America’s future (and, by inference, common stock investing in today’s markets). Do not treat these remarks as one man’s opinions or as a guru’s pearls of wisdom. Rather, as a 79-year old expert’s beliefs built on a foundation of knowledge, experience and a talent for investing.

Asked about the state of business-

There’s not this fear that was prevalent eight or ten months ago, but business has not bounced very much.  It will.  I don’t know when, but it will.  We wouldn’t be putting out the equivalent of $34 billion unless I felt there’s a lot of good years for America.  America’s best years lie ahead.  There’s no question about that.

Asked about the country’s problems-

… this country will solve its problems.  We’re not so good necessarily at avoiding problems, but we’re pretty good at solving problems.  And I remember back in the early ’80s, we thought that Germany and Japan were going to eat our lunch and we’d all just be working at McDonald’s and cutting each other’s hair or something to keep busy.  But we added tens of millions of jobs since then.  So, we do come up with things.  You can’t predict that we’ll have a software industry or you can’t predict that we’ll have a great aircraft industry, but those things come along.  And the world right now, 12 percent of our GDP is going to exports and 35 years ago only 5 percent was.  So we are making some things the world wants.  … you’ve got to count on the potential of people that you and I don’t even know coming up with new things to do that the world wants.  Historically, we’ve been very good at that, and I think we’ll be good at it in the future.

Asked about the state of the real estate market-

Residential real estate has improved.  It leveled off, and in most areas … it’s a local market.  But what really is helping residential real estate, frankly, is that we haven’t been building very many houses.  And we keep forming households.   That sops up the excess inventory.   So we’re seeing in places like California, we’ve seen a real stabilization in the lower-end, and the medium-end.   Now, at the high end, that’s not true.   But for most housing in the low to medium-price range, I think there’s no question that it’s stabilized.  And that’s very important.  Commercial real estate is another story.

Asked about the deficit and taxes-

I [managed an investment fund] in the ’60s when the top personal … income tax rate was 70 percent [and] the capital gains rate was 39.6 percent, and I never saw anybody lose interest in making money.… People have paid a lot higher taxes in the past, and the economy has done just fine. We had great gains in jobs in the ’50s and ’60s with tax rates far higher than they are now. The corporate tax was 52 percent, and American business prospered.  So, [in] this country, you have to have some balance between expenses and income, and right now we have this huge gap, and one way or another it has to be diminished. But this country has done extremely well with lower tax rates, higher tax rates. Our system works.  It unleashes human potential.  We can take higher taxes.

So, Buffett’s actions come from a belief that last year’s concerns are lessening and the future is brightening. That combination describes a good time to invest in common stocks: When the uptrend has started and yet doubters remain. This is that unique period in which both future growth and current prices look attractive.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

November 2009